As Natural Gas Glut Looms, Producers Eye the Weather

The whole world is talking about energy shortages, but for the moment, the U.S. natural gas business is looking at a potential glut.

Thanks in part to a warm winter, inventories of natural gas have built up to levels far greater than normal for this time of year. And terminals built to handle imports of liquefied natural gas from other countries are operating at about half of their capacity.

It is, unfortunately for consumers, a situation that may not last. Energy traders are still pricing futures contracts at high levels, and natural gas producers are planning for big increases in U.S. demand over the coming years. Yesterday, the Federal Energy Regulatory Commission approved proposals to build three new terminals and expand two others that together would triple the nation's capacity to import liquefied natural gas (LNG). One of those projects is an expansion of the LNG terminal at Cove Point in Calvert County, Md.

But for now, as anxiety grips oil markets, natural gas markets have calmed down in the past five months. At the end of last week, natural gas in storage amounted to 2.4 trillion cubic feet, up 23 percent from a year earlier and 38 percent higher than the five-year average, according to the Energy Information Administration. As a result, natural gas prices, which spiked as high as $15 a thousand cubic feet last winter, finished yesterday at $6.32 at Henry Hub, La., an industry benchmark.

The only things that can rescue natural gas producers from having to slash prices later this year: another big hurricane or a hot summer.

"What people are counting on is that there will be a hurricane that will disrupt [natural gas] production in the Gulf of Mexico the way Katrina and Rita did and that all that gas in storage is needed to make things work," said Adam Sieminski, chief energy economist of Deutsche Bank.

A report last week by Cambridge Energy Research Associates says that without another major disruption of natural gas production in the Gulf of Mexico or a particularly hot summer to drive up air-conditioning needs, the nation's storage capacity for natural gas will fill to the brim by autumn, producing a "real potential for an abrupt decrease in gas prices" as some storage fields become unable to accommodate additional injections.

This doesn't mean that consumers can expect any immediate relief. Most utilities sign contracts for anywhere from one to three years, and the benefits of lower prices will hinge on when contracts expire, as well as the weather between now and the fall. And current prices are still substantially higher than they were three or four years ago.

The most immediate effect of falling natural gas prices will come at utilities or power-generating firms with the capability to burn either coal or natural gas. "We're beginning to get substitutions," Sieminski said. "At this price level, it actually makes sense to stop burning coal and start burning natural gas."

Most energy analysts, however, see the bulge in natural gas supplies as temporary. "We have a little bit of a reprieve, but I don't think it's a sustainable reprieve," said John Dearborn, vice president for global energy at Dow Chemical Co., a major natural gas user. "We have been able to build up inventories faster than in years prior, but that's no indication of where gas inventories are going to end up. If we have a warm summer and a normal-to-cold winter, we will find ourselves back in the position we were in last winter."

Most players in futures markets agree. Prices for natural gas to be delivered in January stand at $11.10 a thousand cubic feet, what Dearborn calls "the danger area" for consumers like Dow Chemical.

Most oil and gas companies and natural-gas-producing countries are going ahead with plans to meet demand that they expect to rise quickly over the next five to 15 years. In the United States, Sieminski noted, consumption of natural gas is expected to rise by about 30 percent by 2020. Since domestic natural gas production is essentially flat, most of the supply needed to meet that demand is expected to come from abroad in the form of LNG.

That has set off a scramble over LNG terminals and permits to build them. Many states and cities are reluctant to have such terminals. Last week, ConocoPhillips withdrew an application to build an LNG terminal 11 miles off the coast of Alabama, citing uncertainty about local environmental concerns. But it said it might file a new application "after consideration of all the economic factors."

Lord John Browne, chief executive of BP PLC, said in a speech in Washington yesterday that his company plans to invest $700 million in LNG terminals in the United States.

Yesterday's FERC approvals would have impact on both the Gulf and Atlantic coasts. Dominion will be able to increase its LNG import capacity to 1.8 billion cubic feet a day, up from 1 billion currently. In addition to Dominion's project, other projects approved by FERC yesterday were in Louisiana, Texas and New Jersey.

"This supply increase will have a significant impact on domestic natural gas prices in the future," said FERC Chairman Joseph T. Kelliher.

"If you need the gas, you have to build the terminals," Qatar's oil minister, Abdullah bin Hamad al-Attiyah, said yesterday in a briefing in Washington.

Qatar is gearing up to meet the demand on its end. It is in the midst of a massive expansion program to triple its capacity to export LNG. After meeting with representatives of U.S. natural gas consuming companies yesterday, Attiyah said, "I told them: 'I am a seller. I am here. But you have to provide the facilities.' "